Facebook-Style Mishaps Avoidable With Coordination, NYSE Says

June 20 (Bloomberg) -- U.S. stock exchanges need the
ability to halt trading in a given security on all venues when
technical problems similar to Facebook Inc.’s debut threaten
orderly buying and selling, an NYSE Euronext executive said.

While exchanges can halt transactions on their own markets,
there’s no procedure to stop a company from changing hands
everywhere, Joseph Mecane, co-head of U.S. listing and cash
execution at NYSE Euronext in New York, said at a Securities
Industry and Financial Markets Association conference yesterday.

Mecane’s comments come a month after Nasdaq OMX Group Inc.,
a rival exchange operator, struggled to start trading in
Facebook. A technical glitch with the auction to set its first
price delayed the open while Nasdaq’s efforts to fix the problem
prevented trade execution reports from being disseminated for
more than two hours, spurring confusion among brokers and
investors. Equities trading is now spread across more than a
dozen exchanges and electronic communications networks and
broker-owned platforms including more than 40 dark pools.

“Sometimes as much testing as you do there are situations
that come up that you can’t plan for,” Mecane said yesterday in
a panel discussion at the Sifma technology conference in New
York. “A lot of this increased speed and automation and
infrastructure and complex routing comes at a cost.” The
exchange that lists a stock needs the “ability to halt a stock
in a situation where there is a problem,” he said.

‘Black Eye’

No company has completed a U.S. IPO since Facebook raised
$16 billion in the biggest-ever initial offering for a
technology company on May 17, Bloomberg data show. The shares
have fallen 16 percent since the $38 offer price. Nasdaq’s
mishandling of the situation was a “black eye” for the
securities industry, Mecane said.

Robert Madden, a spokesman for New York-based Nasdaq OMX
Group Inc., declined to comment.

Joseph Cangemi, a managing director at ConvergEx Group, a
New York-based broker, agreed there should be a so-called
regulatory halt when a systems malfunction on an exchange that
lists a stock affects trading across markets. Such a halt should
supersede an exchange’s decision to stop trading on its own
venue, he said in an interview after the Sifma panel.

Exchanges and regulators need a “hot line” or other ways
to communicate for “watershed events” that can disrupt trading
across venues, Bryan Harkins, chief operating officer of Jersey
City, New Jersey-based Direct Edge Holdings LLC, which owns two
U.S. equity markets, said on the Sifma panel. More communication
among exchanges can help address problems before they snowball,
he said.

Coordination Needed

Nasdaq’s problems with Facebook showed coordination among
exchanges is necessary to ensure that problems on one market
don’t spill into rival venues, Mecane said.

“Part of the confusion that came out of the transaction
was because there was not a lot being said publicly,” he said
of Nasdaq’s oversight of the Facebook IPO auction. “That lack
of clarity contributed to a lot of the confusion going on.”

Facebook, owner of the biggest social networking website,
was scheduled to open at 11 a.m. New York time on May 18 after
the offering was priced by underwriters. At about 11:07 a.m., a
Nasdaq official told market participants on a conference call
that the exchange was delaying the opening. Aside from
assurances that an update was coming, the phone line went silent
until just before the first trade at 11:30 a.m., according to
two people who were on the call and asked not to be identified
because the discussions were private.

‘All Clear’

Another way to limit fallout from malfunctions would be for
exchanges to wait to start trading shares in an IPO until the
market that lists the stock gives an “all-clear” message
following the execution of its opening auction transaction,
according to Chris Isaacson, chief operating officer of Bats
Global Markets Inc., who also spoke at the panel. The delay
wouldn’t have to be more than 30 seconds and could be as brief
as a few seconds, he said in a subsequent interview.

Exchange operator Bats, based in Lenexa, Kansas, withdrew
its own IPO on May 23 after technical problems publishing its
opening transaction prevented the company’s shares from shifting
into what’s called continuous trading, or buying and selling
after the initial auction. Bats “as the exchange as well as the
issuer” halted trading in its own shares after the mishap,
Isaacson said. It pulled the IPO later that day.

Trading on a stock’s first day as a public company is
different than it is on subsequent days or weeks, in part
because the company’s price must be tested by market demand
without a price history. The listing market usually has a bigger
portion of trading on the first day than it does subsequently.

Nasdaq’s Share

Nasdaq traded 45 percent of Facebook shares on May 18 and
accounted for 26 percent from May 21 through yesterday,
according to data compiled by Bloomberg. The exchange traded 47
percent of the share volume in Carlyle Group Inc., which it
lists, on May 3, its first day of public transactions, and has
handled 29 percent since then. Nasdaq was 31 percent of Groupon
Inc.’s volume on its Nov. 4 debut in the market and has traded
22 percent from Nov. 7 through yesterday, the data show.

“The vast majority of liquidity is going to be on the
listing market on the first day of trading,” Isaacson said in
an interview, underscoring the importance of that exchange to
overall buying and selling during a stock’s debut. “Once the
listing market transitions from the auction to the continuous
market successfully, others could start trading.”

Mecane said the idea of competing markets delaying trading
by a small amount of time is worth considering. The presumption
among exchanges has been that once the opening transaction is
published, trading in the stock is OK and other markets can
compete with the listing venue, he said.

“For Facebook and Bats, the first print with the opening
cross wasn’t necessarily positive confirmation that continuous
trading was going to be orderly,” Isaacson said.